The Phantom Menace By PAUL KRUGMAN
Tom Davos
The Phantom Menace By PAUL KRUGMAN
Published: November 22, 2009
A funny thing happened on the way to a new New Deal. A year ago, the
only thing we had to fear was fear itself; today, the reigning
doctrine in Washington appears to be bBe afraid. Be very afraid.b
What happened? To be sure, bcentristsb in the Senate have hobbled
efforts to rescue the economy. But the evidence suggests that in
addition to facing political opposition, President Obama and his inner
circle have been intimidated by scare stories from Wall Street.
Consider the contrast between what Mr. Obamabs advisers were saying on
the eve of his inauguration, and what he himself is saying now.
In December 2008 Lawrence Summers, soon to become the administrationbs
highest-ranking economist, called for decisive action. bMany experts,b
he warned, bbelieve that unemployment could reach 10 percent by the
end of next year.b In the face of that prospect, he continued, bdoing
too little poses a greater threat than doing too much.b
Ten months later unemployment reached 10.2 percent, suggesting that
despite his warning the administration hadnbt done enough to create
jobs. You might have expected, then, a determination to do more.
But in a recent interview with Fox News, the president sounded
diffident and nervous about his economic policy. He spoke vaguely
about possible tax incentives for job creation. But bit is important
though to recognize,b he went on, bthat if we keep on adding to the
debt, even in the midst of this recovery, that at some point, people
could lose confidence in the U.S. economy in a way that could actually
lead to a double-dip recession.b
What? Huh?
Most economists I talk to believe that the big risk to recovery comes
from the inadequacy of government efforts: the stimulus was too small,
and it will fade out next year, while high unemployment is undermining
both consumer and business confidence.
Now, itbs politically difficult for the Obama administration to enact
a full-scale second stimulus. Still, he should be trying to push
through as much aid to the economy as possible. And remember, Mr.
Obama has the bully pulpit; itbs his job to persuade America to do
what needs to be done.
Instead, however, Mr. Obama is lending his voice to those who say that
we canbt create more jobs. And a report on Politico.com suggests that
deficit reduction, not job creation, will be the centerpiece of his
first State of the Union address. What happened?
It took me a while to puzzle this out. But the concerns Mr. Obama
expressed become comprehensible if you suppose that hebs getting his
views, directly or indirectly, from Wall Street.
Ever since the Great Recession began economic analysts at some (not
all) major Wall Street firms have warned that efforts to fight the
slump will produce even worse economic evils. In particular, they say,
never mind the current ability of the U.S. government to borrow long
term at remarkably low interest rates b any day now, budget deficits
will lead to a collapse in investor confidence, and rates will soar.
And itbs this latter claim that Mr. Obama echoed in that Fox News
interview. Is he right to be worried?
Well, spikes in long-term interest rates have happened in the past,
most famously in 1994. But in 1994 the U.S. economy was adding 300,000
jobs a month, and the Fed was steadily raising short-term rates. Itbs
hard to see why anything similar should happen now, with the economy
still bleeding jobs and the Fed showing no desire to raise rates
anytime soon.
A better model, Ibd argue, is Japan in the 1990s, which ran persistent
large budget deficits, but also had a persistently depressed economy b
and saw long-term interest rates fall almost steadily. Therebs a good
chance that officials are being terrorized by a phantom menace b a
threat that exists only in their minds.
And shouldnbt we consider the source? As far as I can tell, the
analysts now warning about soaring interest rates tend to be the same
people who insisted, months after the Great Recession began, that the
biggest threat facing the economy was inflation. And letbs not forget
that Wall Street b which somehow failed to recognize the biggest
housing bubble in history b has a less than stellar record at
predicting market behavior.
Still, letbs grant that there is some risk that doing more about
double-digit unemployment would undermine confidence in the bond
markets. This risk must be set against the certainty of mass suffering
if we donbt do more b and the possibility, as I said, of a collapse of
confidence among ordinary workers and businesses.
And Mr. Summers was right the first time: in the face of the greatest
economic catastrophe since the Great Depression, itbs much riskier to
do too little than it is to do too much. Itbs sad, and unfortunate,
that the administration appears to have lost sight of that truth.